Investment Missing Forecast Means Poloz Keeps Rates Low

Bank of Canada Governor Stephen Poloz
will have to consider keeping interest rates low for longer
because business investment won’t lead economic growth the way
his predecessor Mark Carney predicted.

Poloz, who took over the country’s central bank June 3,
will probably face questions about the prospects for economic
expansion during testimony to the House of Commons Finance
Committee at 8:45 a.m. in Ottawa tomorrow. It will be his first
public comment since becoming the ninth Bank of Canada governor.

Carney forecast in April that growth in the world’s 11th-largest economy would accelerate to 2.8 percent in 2014 as the
contribution from business investment doubles. That view is at
odds with Statistics Canada figures showing investment stalled
over the past year as well as the bank’s own survey of business
spending intentions.

“They have been banging on that drum for a while now,
stimulating growth and letting business lead growth, but it
hasn’t materialized,” Eric Bushell, chief investment officer of
CI Investments Inc., said in a phone interview. “I’m not
optimistic that it will,” said Bushell, who helps oversee C$35
billion ($34 billion) for CI’s Signature Global Dividend Fund.

The Bank of Canada has pinned its expectation for growth on
business spending and exports, with household spending limited
by record consumer debt loads and federal and provincial
governments curbing spending to eliminate deficits. Still,
prices for the country’s exported commodities have stalled over
the past two years according to a central bank index, leaving
companies hesitant to spend and increasing the chances the
central bank will keep its policy rate on hold at 1 percent into
2015.

Borrowing Costs

Carney said at every interest rate decision since April
2012 that borrowing costs could rise as the Canadian economy
approaches its full capacity.

“Business investment has been largely driven by the
resource sector and there have been some signs that given the
softness in commodities we could see a little bit of investment
spending pullback,” said Darcy Briggs, fund manager in Calgary
at Franklin Templeton Investments Corp.’s Bissett Investment
Management, which oversees about C$4 billion in fixed income
assets. “If it isn’t as robust as they expect, monetary policy
will likely remain more neutral for a longer period of time.”

The central bank cited weak global demand and the
“persistent strength” of the Canadian dollar as drags on
exports in a statement accompanying its May 29 policy decision.
Statistics Canada said yesterday the country recorded a 16th
consecutive monthly trade deficit in April, the longest stretch
in at least a quarter century.

‘Highly Uncertain’

The bank’s investment forecast is “highly uncertain,”
because “clouds remain over the near-term outlook for the U.S.,
European, and Chinese economies,” said Derek Holt, Scotiabank’s
vice-president of economics in Toronto in a note to investors
last week.

Poloz, 57, was chief executive officer of Export
Development Canada, a government trade financing agency, before
returning to the central bank where he started his career. While
at EDC, Poloz echoed the view that exporters are being pressured
by the dollar’s rise and must find new markets to remain
competitive. “Our exporters face stiff competition from new
entrants and a strong currency,” he said in an April 2012
speech in Tokyo.

The Canadian dollar was relatively stable during Carney’s
more than five years as governor, weakening 4.1 percent in that
time after surging 49 percent to around parity with the U.S.
dollar under former Governor David Dodge. The currency gained
0.1 percent to C$1.0336 per U.S. dollar at 9:15 a.m. in Toronto.
One dollar buys 96.75 U.S. cents.

No Advantage

Companies aren’t taking advantage of conditions that should
encourage spending, including low borrowing costs and record
levels of cash on hand. Today Statistics Canada reported that
non-residential building permits fell 3.6 percent to C$2.60
billion in April, leaving them 5.9 percent lower than a year
earlier.

Non-financial companies held C$600 billion of currency and
deposits in the fourth quarter, up from C$434 billion in
mid-2009 as the last recession ended, according to Statistics
Canada. Calgary-based Suncor Energy Inc. (SU) had C$4.6 billion in
cash and marketable securities in the first quarter, top among
non-financial companies that have a market value of more than
C$1 billion, according to data compiled by Bloomberg.

While Carney said last year companies are stockpiling
“dead money” that should be invested or paid out as dividends,
Poloz said in a 2011 speech that companies are building cash in
response to a volatile global economy.

‘Black Swan’

“Successful companies are stress-testing their business
plan with a vigor never thought necessary in the past,” Poloz
told the Toronto Board of Trade in October 2011. “There are
costs associated with this behavior, but they are seen as sunk
costs -- they are necessary insurance against the next black
swan.”

Finance Minister Jim Flaherty tried to encourage business
spending in his March 22 fiscal plan through measures that would
give companies incentives to train workers and buy and equipment
purchases.

West Fraser Timber Co. Chief Financial Officer Larry Hughes
says while his company is boosting investment on signs of a U.S.
housing rebound, other companies aren’t joining him.

“Dead money, that’s not what we’re all about,” Hughes
said June 3 in an interview at the company’s Vancouver
headquarters. North America’s largest lumber producer is raising
capital spending to boost the efficiency of its mills in the
U.S. and Canada after underinvesting for several years amid the
housing crisis and a multiyear slump in wood prices.

“Businesses are being very conservative right now about
volatility and they don’t want to get too far ahead of things,”
he said.